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Myanmar in 2015:Risks, Prospects & Challenges

Date: 27 March 2015Time: 9.00am – 11.30amPresentation by: Chester Toh

Co-HeadMyanmar Practice

Overview of Key Legal Developments in Myanmar

Not to be reproduced or disseminated without permission.2

What we will cover

Situation in Myanmar now

Draft Myanmar Investment Law (“MIL”)

Draft Myanmar Companies Act (“MCA”)

Draft Union Tax Law

Myanmar Competition Act

Looking forward…

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3 Not to be reproduced or disseminated without permission.

Situation inMyanmar now

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Situation in Myanmar now

• Still in process of legislative reform - laws and regulations required fordifferent sectors

• Still no full functioning work permit system, PR regime recently introduced

• Catching up on sector-specific rules, e.g. interconnection rules for telecoms sector

• Electricity Law passed in October 2014 - liberalisation of an important sector

• Problem compounded by compressed parliamentary time-table in 2015

• Key pieces of legislation still to be passed:

• Arbitration Bill – submitted to Parliament in Feb 2015

• Draft Bank and Financial Institutions Law – crucial in light of foreign bank licencesissued

• Draft Condominium Law – to introduce concepts of collective ownership

• Draft Intellectual Property Law – currently in 12th draft; AGO working on finalamendments

• Draft Trademark Law

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5 Not to be reproduced or disseminated without permission.

Draft MyanmarInvestment Law

(“MIL”)

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Overarching aim of the draft MIL

• Consolidating the Myanmar Citizens Investment Law 2013 and ForeignInvestment Law 2012

• Unifying the investment law regime - creating a level playing fieldbetween local and foreign investors

• Establishing a transparent, equitable and non-discriminatory investmentframework

• Moving towards AEC 2015 goals for free movement of investments

• Restricted sectors under the MIL to be reflected in the list of derogations under theASEAN Comprehensive Investment Agreement?

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Applicability of the draft MIL

• Both domestic and foreign investors to be termed as “Investors”

• Draft MIL proposes to automatically apply to all Investors – no prior requirement to

obtain a permit from the Myanmar Investment Commission (“MIC”) to qualify

• Investors only need to undergo regular process of company registration in Myanmarand be classified as making a Direct Investment

• “Direct Investment” means a lasting interest in an enterprise in Myanmar intended to give the Investoreffective control or significant influence over the management of the enterprise.

• Plans for MIC to be reorganised into an autonomous organ of the MyanmarGovernment

• Unclear as to the potential overlap between draft MIL and Special Economic Zones Law(“SEZ Law”)

• Investing in a SEZ may still have its specific advantages, e.g. free from certain foreign ownershiprestrictions under FIL

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Key provisions of the draft MIL

• Investments in certain restricted sectors may still require MIC approval

• Proposed categories of prohibited/restricted sectors• Sectors where both domestic and foreign investors are prohibited (state monopolies);

• Sectors where foreign investment is prohibited but open to local investors;

• Sectors where foreign investment is allowed but only in partnership (joint venture) withMyanmar citizen/entity; and

• Sectors where domestic or foreign investment requires prior approval of the MIC.

• Schedules of restricted sectors expected to be released in futureimplementing rules

• Potential reform of the State-Owned Economic Enterprises Law?

• Unclear as to whether general trading ban for foreign investors will beaddressed by the MIC given that jurisdiction rests with MoC• Phase-by-phase approach expected e.g. allowing trading of pharmaceuticals at initial stage

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Key provisions of the draft MIL• Right to lease land proposed

• All Investors will have the right to lease land

• Foreign investors have the right to lease land up to 50 years with two extension terms of 10

years each

• cf. Transfer of Immovable Property Restriction Act 1987 which prevents foreign investors from

leasing land for more than 1 year

• No minimum local employment quota

• Proposal to remove minimum percentage quota for local skilled labour as is currently required

under the FIL 2012

• Can employ qualified persons of any nationality for senior management, technical,

professional and advisory positions

• Silent on whether unskilled labour limited to Myanmar citizens, cf. FIL 2012

• Proposal to extend protection against expropriation or nationalisation by theGovernment to all Investors

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Key provisions of the draft MIL

• Proposal to allow all Investors to remit amounts related to:

• capital, which is subject to the Central Bank of Myanmar’s capital account rules;

• profits, capital gains, dividends, royalties, license fees, technical assistance as well astechnical and management fees, interest and other current income;

• proceeds from the total or partial sale or liquidation of a business or property owned inconnection with the business;

• payments made under a contract, including a loan agreement;

• awards resulting from any settlement of disputes in respect of a business enterprise;

• compensation or other payments made pursuant to expropriation or nationalisation;and

• earnings and other remuneration of expatriate personnel legally employed in Myanmar.

• Remittance subject to Foreign Exchange Management Law 2012?

• Current low debt-equity ratio policy is not addressed

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Key provisions of the draft MIL

• Incentives and exemptions

• No specific list of incentives and exemptions within draft MIL – likely to be inimplementing rules. Flexibility and discretion given to Government

• Government may reconsider the tax incentives offered; see Notification No.51/2014where Government removed certain tax exemptions for manufacturing of beer andcigarettes, vehicle repair, restaurants etc.

• Uncertainty as to what are the “non-automatic incentives” as compared to FIL 2012,section 27

• Dispute resolution

• Proposal to allow foreign investors access to international arbitration including:

• Arbitration under the Rules of the UN Commission on International Trade Law(UNCITRAL); or

• International Convention on the Settlement of Investment Disputes (ICSID)

12 Not to be reproduced or disseminated without permission.

Draft MyanmarCompanies Act

(“MCA”)

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Overarching aim of the draft MCA

• Key draft chapters on incorporation, share capital matters, managementand administration, winding up and details on the Registrar have beenreleased

• Ongoing public consultation process as and when DICA releases eachdraft chapter

• The draft MCA is intended to:

• Clarify company registration requirements

• Allow more flexibility for companies in share capital and financing structures

• Modernise management and administration of companies

• Strengthen corporate governance

• Establish an online public registry

• Very ambitious piece of legislation

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Incorporation of a company underdraft MCA

• Single shareholder companies proposed

• Minimum of at least one Myanmar citizen director and one residentauthorised officer proposed

• “Resident authorised officer” shall either be resident director or other resident appointedto represent the company

• Citizen director requirement is unusual

• Foreign company definition suggested - “a company in which anoverseas corporation or foreign person has an ownership interest ofmore than the prescribed ownership amount”

• Prescribed ownership amount expected to be released in future implementing rules

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Incorporation of a company underdraft MCA

• No mandatory objects clause requirement for M&AA under draft law

• Proposal to require M&AA only in Myanmar language

• Proposed abolishment of the Permit to Trade requirement

• Comprehensive online companies registry proposed

• Draft MCA does not address procedures in practice

• There is a need to streamline paper based approach and number of documents requiredby the CRO

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Share capital matters under draftMCA• Proposal to abolish par value of shares

• Proposed requirement on companies to keep various registers:

• Register of members;

• Register of option holders;

• Register of debenture holders; and

• Register of all other interests including interests in share capital or security interests

Duty of every officer of the company to take reasonable steps to maintain such registers

• The company and every officer who is knowingly and wilfully involved in the failure to comply shall beliable to a fine

• Uncertainty as to level of enforcement for maintenance of registers in practice

• Proposed liberalisation in respect of prohibition against financial assistance

• Whitewash procedures – Board approval or shareholders’ resolution

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Management under the draft MCA

• Broad definition of “directors” proposed

• De facto directors and shadow directors covered

• Express directors’ duties under draft

• duty to act with care and diligence;

• duty to act in good faith in the company’s best interest;

• duty regarding use of position;

• duty regarding use of information;

• duty to comply with the law and the company constitution;

• duty to avoid reckless trading; and

• duty in relation to company obligations.

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Management under the draft MCA

• Proposal to abolish SG equivalent of section 162 - Company loans todirectors may be authorised by the Board

• Grant of charges or exercise of rights pursuant to charge by a foreignerwill not breach Transfer of Immovable Property Restriction Act 1987under the draft MCA

• As long as immovable property is not sold to a foreigner

• Lack of clarity as to scope of application

• Proposed that “Small Companies” are not required to comply withcertain financial reporting and auditing requirements

• “Small Company” defined as a company other than a public company which satisfies atleast 2 of the following: it and its subsidiaries have i) < 50 employees; ii) issued sharecapital of < 500 million Kyat in aggregate; or iii) annual revenue of < 50 million Kyat inaggregate

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19 Not to be reproduced or disseminated without permission.

DraftUnion Tax Law

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Overview

• Draft Union Tax Law 2015 published on 26 January 2015

• Expected to take effect from 1 April 2015 if passed in Parliament

• 3 notifications also issued in January 2015 with retrospective effect from1 April 2014

• Notification No.180/2015 – Commercial Tax Regulations which covers claimsto offset commercial input tax against commercial output tax

• Notification No. 181/2015 – Income Tax Regulations which allows taxpayersto claim tax depreciation on assets such as buildings, machinery, vehicles etc.

• Notification No.182/2015 – Income Tax Rules which allows taxpayers toclaim relief of 300,000 Kyat for each child

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Income Tax under the Draft UnionTax Law

• Foreigners residing abroad proposed to be subject to the same personalincome tax rate as local Myanmar citizens

• Progressive tax rates from 0% to 25%

• Under 2014 Union Tax Law, NRFs have to pay 35%

• Capital gains tax for both residents and NRFs – 10% proposed

• Does not apply to companies engaged in O&G

• 40% for NRFs under 2014 Union Tax Law

• Proposal for newly established small and medium enterprises to beexempted from income tax on income for up to 5 million Kyat for thefirst 3 consecutive years of business

Not to be reproduced or disseminated without permission.22

Commercial Tax under the DraftUnion Tax Law

• Some changes proposed for special goods subject to specific prescribed

tax rates

• Cigarettes – increase from 100% (under 2014 Union Tax Law) to 120%

• Liquor, beer, wine – increase from 50% to 60%

• Petrol, gasoline, diesel oil – remains at 10%

• Note Notification No.51/2014 which states:

• manufacturing of alcohol, beer, cigarettes and other similar products and

related services will not be eligible to receive exemptions and reliefs on

customs duty and commercial tax

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Commercial Tax under the DraftUnion Tax Law

• 5% commercial tax payable on whoever produces and sells goods withinMyanmar unless exempted

• Goods not subject to commercial tax• Under draft law, 78 items listed which include agricultural crops and other basic household

necessities

• Also seeks to exempt pharmaceuticals and other medicines and goods sold to foreign embassies

• 5% commercial tax also payable on services unless exempted

• Services proposed to be exempted include microfinance, banking, logistics,licence fees payable to government organisations

• Exemptions for IT services as well as technology and managementconsultancy services proposed to be removed

24 Not to be reproduced or disseminated without permission.

MyanmarCompetition Act

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Key provisions

• Enacted on 24 February 2015

• Applies widely; “all persons” and “entrepreneurs”

• Competition Commission to be established - power to exempt certain arrangements (SMEs oragreements which are aimed at reducing costs and for the benefit of consumers) and setmerger notification thresholds

• Competition Commission can also issue warnings and fines, and suspend businesses fromoperating

• Also has power to commence proceedings against the infringing party

• Investigation Committee also established to interrogate witnesses and enter premises forinvestigations

• Criminal penalties can be imposed on cartels; e.g. imprisonment of 3 years and/or 15 millionKyat fine for acts restricting competition

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4 types of anti-competitive behaviour

• 1) Acts restricting competition• Price-fixing, controlling or prohibiting access to market, bid-rigging etc.

• 2) Acts leading to monopolies• Controlling prices, restricting availability of goods or services to control prices, limiting

supply of goods/services to create shortage of supply, interfering with another’s businessunfairly

• 3) Unfair competitive acts• Misleading consumers, disclosure of trade secrets, discrimination against other

businesses etc.

• 4) Business combinations, such as mergers, which lead to marketdominance, reduce competition in a market with few players or exceedsa prescribed market share threshold• Mergers defined to include affiliations, amalgamations, acquisitions, JVs

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Uncertainties in the new CompetitionAct

• Does not address horizontal and vertical agreements, or distinguishbetween both, possibly reserved for guidelines or implementingregulations?

• Separate treatment for hard-core restrictions or per se offences?

• No concept of “relevant market”?

• Threshold for dominance to be prescribed by Competition Commission

• Interaction of competition law and existing restraint of trade doctrine

28 Not to be reproduced or disseminated without permission.

Looking forward…

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Looking forward…

• Anti-money laundering rules expected in coming months

• Minimum wage expected to be introduced in second half of the year

• Yangon Stock Exchange targeted to open later part of 2015

• Successful securities licensees expected to be announced in comingmonths

• Elections expected in first week of November

30 Not to be reproduced or disseminated without permission.

The material in this presentation is prepared for general information only and is notintended to be a full analysis of the points discussed. This presentation is also notintended to constitute, and should not be taken as, legal, tax or financial advice byRajah & Tann. The structures, transactions and illustrations which form the subject ofthis presentation may not be applicable or suitable for your specific circumstances orneeds and you should seek separate advice for your specific situation. Any referenceto any specific local law or practice has been compiled or arrived at from sourcesbelieved to be reliable and Rajah & Tann does not make any representation as to theaccuracy, reliability or completeness of such information.

Disclaimer

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31 Not to be reproduced or disseminated without permission.Not to be reproduced or disseminated without permission.